THE MOTLEY FOOL

Saturday

Jul 10, 2010 at 12:09 AM

The Motley Fool

Ask the Fool

Of Interest

Q: What makes interest rates go up and down? -- J.S., Columbus, Ind.

A: Interest rates are strongly influenced by inflation and the market for debt (notes, bills, bonds, etc.). With inflation rather low in recent years, we've been enjoying low interest rates. (Even if they rise a bit, they will still be really low, historically speaking.)

These days, we're looking forward to recovering from our recent recession. But as that happens, if the economy appears to be growing too briskly, the Federal Reserve, headed by Ben Bernanke, may hike short-term interest rates via the "federal funds rate" in order to slow growth. (The federal funds rate is the rate a bank can charge another bank for use of its excess money.)

When the economy is sluggish, the Fed often cuts rates, as lower rates give companies and people an incentive to borrow (and spend) money.

The Fed can also change the "discount rate" -- the rate paid by a bank to borrow short-term funds from the Fed.

The prime rate and other interest rates are based primarily on these two interest rates, while mortgage rates are linked to Treasury bill rates. The money markets themselves (basic supply and demand for money) also exert great influence over interest rates.

A: Publicly traded companies are required to report on their earnings and financial condition each quarter. Once a year they issue comprehensive "10-K" reports, along with their annual report. In the intervening quarters, they issue less substantial "10-Q" reports. 10-K reports include details on the company's recent performance, risks and more, and their financial statements are audited. 10-Q reports, though, are not required to be audited.

Fool's School

Investing in Africa

Africa is the continent with the most untapped potential. It has more than 1 billion people and the world's fastest-growing population, abundant natural resources, arable land, accessible coasts and myriad other advantages. But for a variety of reasons, it has yet to capitalize on these possibilities.

With the entire globe recently watching the World Cup tournament in South Africa, many wonder whether this is the beginning of a new era for the region.

The continent's problems persist, though. They include crime, corruption, extreme poverty, disease and exploitation. Given economies that are largely dependent on natural resources, and governments that tend to be either unstable or unfriendly to business, how can corporations or investors expect to make money in Africa?

As it turns out, certain companies in Africa have performed well. A recent study by business management consultants McKinsey found that leading up to the global economic downturn, publicly traded companies operating in Africa earned on average a return on capital that was "two-thirds higher than that of comparable companies in China, India, Indonesia and Vietnam." While economies in Africa have subsequently suffered from the decline in commodity prices, it's clear that the potential exists in Africa for investors to make money.

A number of companies operating in Africa are finding innovative ways to do just that. But given the risks, it's probably best for most of us to avoid investing in any individual African companies, unless they're exceptionally undervalued and we're willing to take the chance.

Consider opting for broad diversification within the region, instead. Thanks to exchange-traded funds (ETFs), that strategy is easy. Our "Motley Fool Global Gains" analysts like Market Vectors Africa (NYSE: AFK) ETF, which holds 50 large- and mid-cap stocks across the continent, with exposure to both resource companies and consumer names. Best of all, its annual fee is a reasonable 0.83 percent.

While Africa's long-term growth trajectory looks promising, there will be volatility along the way. Capture that upside and protect yourself against volatility by diversifying across countries and companies via an ETF such as Market Vectors Africa.

My Dumbest Investment

Bad News Delivery

Webvan, the online grocery delivery service, was my dumbest investment ever. I bought into it originally because it was one of those perfect-looking stocks during the dot-com era. People were so busy counting their money that they had no time to go to the grocery store -- how could it fail? I'd see the delivery trucks running up and down the street and thought, "This thing's going to catch on!" But it didn't. I even used the service and found it to be wanting -- yet I held onto the stock anyway. -- R.J., San Jose, Calif.

The Fool responds: You were right to consider a company familiar to you, but that's not enough. If you found the service lacking, know that others would, too. Even if you loved it, you would want to make sure that the company had ample cash to fuel its growth, a sound business strategy and competitive advantages. Webvan expanded aggressively, but didn't attract enough customers and lost lots of money. It filed for Chapter 11 bankruptcy protection just a year and a half after its IPO.

Foolish Trivia

Name That Company

Based in Grapevine, Texas, I'm the world's biggest retailer of video games and entertainment software, selling both new and used hardware as well as software. I trace my roots back to Babbage's, which merged with Software Etc., and was later sold to Barnes & Noble. Then I merged with Funco, and later adopted my current name. I operate more than 6,400 stores in the U.S. and 16 other nations, and I employ more than 45,000 people. I rake in about $9 billion annually, up from just $1 billion in fiscal 1998. Who am I?

Last Week's Trivia Answer

I trace my roots back to the Star Furniture Co. of Zeeland, Mich., which my namesake purchased in 1923. In 1968, I introduced the world's first open-plan modular system of panels and attaching components, pioneering modern office design. (Think cubicles.) I believe in good design, participative management and environmental responsibility. I've been offering ergonomic products for decades. You'll find many of my wares, such as my popular Aeron chair, in museum collections. Famous designers who've worked for me include Charles and Ray Eames, George Nelson, and many others. I'm one of Fortune magazine's "Best Companies to Work For." Who am I? (Answer: Herman Miller)

The Motley Fool Take

Is Freeport a Buy?

The world's largest publicly held copper producer, Freeport-McMoRan (NYSE: FCX), which also produces gold and molybdenum, has seen its stock slump recently as copper prices have dropped.

That has happened in spite of gold's rise and the possibility that molybdenum is headed higher. (Energy applications such as deepwater wells, oil sands and nuclear power use molybdenum.) Many expect copper to rebound, too, due to demand from China and Brazil.

Should price improvements occur, Freeport stands to be one of the primary beneficiaries. The company boasts a number of strengths, including the geographic spread of its high-quality, long-lived minerals reserves.

Its Grasberg operation in Papua, Indonesia, is the world's largest copper and gold mine in terms of reserves. And its still-new Tenke Fungurume operation in the Democratic Republic of Congo began producing copper cathode slightly more than a year ago. That operation is moving toward full-scale production of cobalt and sulfuric acid. Exploration and capacity expansions for molybdenum are occurring at several company facilities.

Freeport-McMoRan came into its own in 2007 when it acquired Phelps Dodge, a copper producer twice its size. With a price-to-earnings (P/E) ratio recently below 10, it's looking like an attractive investment contender -- if you can handle its volatility.

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